FM FM Derivatives and Options 1 — Questions and Answers
Question 1: A forward contract on the FM exam obligates the buyer to:
- Purchase an asset at a predetermined price on a specified future date (Correct answer)
- Sell an asset at any time before expiration
- Pay a premium for the right to buy at market price
- Exchange interest payments with a counterparty
Correct answer: Purchase an asset at a predetermined price on a specified future date
A forward contract locks in a purchase price (the forward price) for delivery of the asset at a future date.
Question 2: The no-arbitrage forward price F₀ for a non-dividend-paying stock with current price S₀ at effective annual rate i over T years is:
- F₀ = S₀ × (1 + i)^T (Correct answer)
- F₀ = S₀ / (1 + i)^T
- F₀ = S₀ + i × T
- F₀ = S₀ × e^(−iT)
Correct answer: F₀ = S₀ × (1 + i)^T
The no-arbitrage forward price equals the future value of the current spot price: F₀ = S₀(1 + i)^T.
Question 3: A call option gives the holder the right to:
- Buy the underlying asset at the strike price before or at expiration (Correct answer)
- Sell the underlying asset at the strike price before or at expiration
- Receive interest payments from the option writer
- Exchange one currency for another at a fixed rate
Correct answer: Buy the underlying asset at the strike price before or at expiration
A call option grants the holder the right (but not the obligation) to buy the underlying asset at the strike price.
Question 4: Put-call parity for European options states:
- C − P = S₀ − K·v^T (Correct answer)
- C + P = S₀ + K·v^T
- C − P = K·v^T − S₀
- C × P = S₀ × K·v^T
Correct answer: C − P = S₀ − K·v^T
Put-call parity: C − P = S₀ − K·v^T, where C and P are call and put prices, S₀ is spot, K is strike, and v = 1/(1+i).
Question 5: On the FM exam, the payoff of a long call option at expiration with strike K and terminal asset price S_T is:
- max(S_T − K, 0) (Correct answer)
- max(K − S_T, 0)
- S_T − K
- K − S_T
Correct answer: max(S_T − K, 0)
The call option payoff is max(S_T − K, 0): positive if the asset exceeds the strike, zero otherwise.
Question 6: Which strategy involves buying a call and selling a call at a higher strike, both with the same expiration?
- Bull call spread (Correct answer)
- Bear put spread
- Straddle
- Collar
Correct answer: Bull call spread
A bull call spread is buying a lower-strike call and selling a higher-strike call, profiting from a moderate price rise.
FM FM Derivatives and Options 1
A forward contract on the FM exam obligates the buyer to: